Seeking Absolute returns

The EquityBell Securities leveraged model portfolio was started on 27th January 2009 as a paper trade with an initial value of £100,000.

Only our most robust investment ideas will be placed into the portfolio explaining the rationale, entry price with comments on reasons for holding and explanation of the exit and price and net profit and loss.

Transcript of "Seeking Absolute returns"

1.
MODEL PORTFOLIO
SEEKING ABSOLUTE RETURNS
25th February 2009
Sound Advice
EquityBell Securities was set up in October 2008 by a collective of seasoned market professionals to provide
outstanding investment advice to clients running non-discretionary portfolios through direct market access
brokers and wealth managers. The credo is absolute returns by giving sound advice in asset classes that are
individually appropriate to the risk appetite and base currency of each particular client.
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The EquityBell Securities leveraged model portfolio was started on 27 January 2009 as
a paper trade with an initial value of £100,000.
Starting Value £100,000
The portfolio currently has an NAV of £100,073, up 0.07% in 30 days.
Portfolio NAV £100,073
Leverage 3.11 times
Only our most robust investment ideas will be placed into the portfolio explaining the
Profit £73 +0.07%
rationale, entry price with comments on reasons for holding and explanation of the exit
and price and net profit and loss. Current Positions
FX
Open trades Short €100k EURUSD @
1.2786
Date Asset size FX price value margin Price value £ P/L
now
26/1/2009 June Gilt Short 1 GBP 118.71 118,710 3000 120.78 120,780 -2,070 Commodities
Future
None
26/1/2009 MRW Long £50k GBP 258.00 50,052 7,500 261 50,634 582
shares CFD’s
Fixed Income
26/1/2009 SBRY Short GBP 309.75 -50,024 7,500 312 -50,388 -363
shares £50k Short June 10 yr Gilt Future
CFD’s
26/1/2009 Carrefour Long €50k EUR 26.495 50,341 7,000 26.83 50,977 567
Equities
shares CFD’s
26/1/2009 LVMH Short EUR 43.42 -50,367 7,000 46.24 -53,638 -2,917 Food Retail Spread
shares €50k Long Morrison CFD 258p
CFD’s Short Sainsbury CFD
25/2/2009 EURUSD Short EUR 1.2786 88,152 1,763 1.2769 89,301 119
309.75p
FX 100k
Luxury/Staple Spread
Closed trades Long Carrefour
CFD @ €26.495
Date Asset size FX price £ value margin Exit Exit £ P/L
date price taken
26/1/2009 EURJPY Short EUR 118.606 92,988 2,800 02/02/ 113.35 4,155 Short LVMH
FX 100k 2009
CFD @ €43.42
THIS IS A MARKETING COMMUNICATION
Intended for information only and should not be construed as an invitation or offer to buy or sell any investment vehicle or
instrument. This note has not been prepared in accordance with legal requirements designed to promote the
independence of investment research; and is not subject to any prohibition on dealing ahead of the dissemination of this
marketing note. EquityBell Securities will provide extra detail on data or graphs used in this note upon requested.

2.
MODEL PORTFOLIO
SEEKING ABSOLUTE RETURNS
25th February 2009
Sound Advice
FX
Much has been made of levels of public sector net debt verses external debt levels. Commentators got very
worried that 3Q08 UK external debt was reported by the UK Office of National Statistics at £5.97 trillion, where
GDP was £1.4 trillion and public sector net debt at £697 billion.
Public Sector Public Debt External External Debt External Debt
Country GDP
Net Debt per Worker Debt per Worker as a % of GDP
UK $987 bil $33,616 $2.05 tril $8.45 tril $287,957 412%
USA $10.6 tril $73,611 $14.58 tril $13.63 tril $94,444 93%
Japan $6.0 tril $2.32 tril $36,825 39%
$8.4 tril $132,300
France $1.35 tril $48,300 $2.1 tril $4.58 tril $163,889 218%
Germany $1.86 tril $45,588 $3.65 tril $4.85 tril $118,978 133%
Source: BoE, ONS, US Fed, BdF, Bundesbank and MoF
The extraordinarily high level of UK external debt was explained as hedge fund and bank investment leverage,
particularly on the JPY carry trade (where JPY is borrowed at low rate and converted into another currency to
trade). As hedge funds met redemptions and trading books reduced risk, large portions of this borrowing has
been retired. This huge JPY buying and USD and GBP deleverage selling has seen the JPY rally while
depressing GBP and USD. As the lion’s share of the unwind has happened, the JPY can now weaken from
overbought and USD and GBP strengthen from over sold. Britain’s relatively low level of public sector net debt
per worker (compared to Japan) suggests that UK government has a vast amount of room to borrow and print
more money to stimulate the UK economy which will not be good for GBP.
Our greatest concern is the EUR and the scale of bank lending. Peripheral Europe (Ireland, Portugal, Spain,
Italy, Greece, Austria and the former Soviet states) have vast lending and fading economies. France and
Germany do not have the political will to effectively help, even if they did have the cash (which they don’t) and the
ECB has no established rescue mechanism. Current prospects for the EUR look worse than the USD and GBP.
Therefore we suggest selling EURUSD at 1.2786 with a target somewhere close to 1.2000 and a stop limit of
1.3089
Commodities
Gold has rallied strongly
from a low of US$682 per
ounce on 24 Oct 2008 to
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1,006 on Friday 20 Feb
2009 (up 47%). Given
that this financial crisis is
truly global for the first
time ever and gold is the
currency of fear, we see
long term gains for gold
beyond US$1,000 per
ounce.
We continue to pursue a
suitable entry price, which
we have currently set at
US$934 for 50 ounces.

3.
MODEL PORTFOLIO
SEEKING ABSOLUTE RETURNS
25th February 2009
Sound Advice
Fixed Income
The global bond market is double the size of the equity markets and is the key indicator of investor sentiment.
The chart below shows 10 year US Treasury note yield since 1962 and also from August 2008, revealing just how
low current rates are.
10 yr US Treasury Note yield currently very low 10 yr US Treasury Note yield currently very
@ 2.83% low @ 2.83%
16 4.5
4
14
3.5
12 3
2.5
10
2
8
1.5
6 1
0.5
4
0
2
0
1962
1966
1970
1974
1978
1982
1986
1990
1994
1998
2002
2006
Data Source:
Yahoo Finance
Yields bottomed at 2% on year end buying and have since risen, despite the decline in the equity markets. If fear
drives investors into bonds at these appalling yields because there is nothing better to buy, the stock market is in
deep trouble.
In the longer term, the US, UK and European governments and corporate will need to raise irresponsibly vast
amounts of money to credibly fight deflation which will eventually push up long end rates in a steep yield curve.
That may not happen until the green shoots of recovery are showing and that could be a while.
Until we see yields rising as investors prepare to switch to shares as deflation fears subside, we cannot start
buying equity markets with conviction. If yields do start dropping to the year end levels we suggest cutting the
short 1 contract of the FLGM9 June UK Long Gilt Bond futures with a stop loss price of 122.0
Equities
We are at a critical juncture in equity markets with the Obama /Bernanke rhetoric fighting deflation and a possible
European banking crisis. Markets never go down in a straight line and we have been expecting a bear market
rally to take the S&P500 back to 1,050 and the FTSE back to 4,500. With high valuations and poor economics
we are struggling to find any basis in reason to tempt investors back into equities except hope that the stimulus
packages will work (which we don’t think they are nearly enough yet).
On the next page is a chart of equity index performance following the ultimate peak of the market during a
financial crisis caused by overburdening debt. We can directly compare how Wall Street 1929, Japan 1989,
NASDAQ 2000 and the S&P500 pan out over the days as governments struggle to reflate economies.
The consolidation has taken a while and we are at a critical juncture to see if this countertrend rally emerges as
we first highlighted in our 8th Dec 2008 “Clear as a Bell” report and we see the probability as fast diminishing.

4.
MODEL PORTFOLIO
ODEL ORTFOLIO
SEEKING ABSOLUTE RETURNS
S
25th February 2009
Sound Advice
Data Source:
Yahoo Finance
In meantime we have maintained our two bearish orientation spreads
Food Retail Spread
Morrison 261.00p on a 12.64 PE and a 1.92 div yield, 2009 est EPS 16.91p
4 1.92%
Sainsbury 312.00p on a 16.53 PE and a 4.06 div yield, 2009 est EPS 19.1p
4.06%
The spread between Morrisons and Sainsbury is now 51p which is just below our initial level of 52p having been
as high as 76p.
We continue suggest to run the position as Morrisons still appear better value than Sainsbury.
Luxury/Staples Spread
Carrefour €26.83 PE 9.94 and a 5.13% div yield, 2009 est EPS €2.66
%
LVMH price €46.24 PE 11.17 and a 3.49% div yield, 2009 est EPS €4.14
%
After the January good results from LVMH, the spread has converged. As prospects for the luxury market
th pects
continue to look bleak and LVMH is still more expensive than Carrefour, we suggest to continue running the
spread.

5.
MODEL PORTFOLIO
SEEKING ABSOLUTE RETURNS
25th February 2009
Sound Advice
Comment
The world is in crisis. China and Japan have the highest current account surpluses in the world, but
are highly leveraged to the Western consumer and have been hit hardest by the belt tightening. Asia
needs to use its cash to adjust from an export led economy to domestic stimulus economy, to survive
the inability of their traditional consumer base to buy their goods. The US and UK are doing their best
to repair the banking system and to facilitate lending before too many cash starved companies go bust.
If the Japan 1990’s model is anything to go by (remember they had huge personal savings that we
don’t enjoy), Obama and Brown will need bigger and faster stimulus packages to inject “real” cash and
create inflation soon. Peripheral Europe is teetering on the brink of an enormous banking crisis that will
cause enormous political and social unrest and upheaval.
The primary trend of equity markets is lower and we have long term targets of S&P500 at 400 and the
FTSE100 at 2,000 over the next 18 months. With P/E ratios having not collapsed (and analysts still
behind the curve), it is difficult for us recommend model portfolio positions to participate in a bear
market rally based on little more than hope (even if they might run for 27%). It is always darkest before
the dawn and news is bleak and sentiment about as bad as it gets, but equities remain above support
(for now).
Gold remains a long term favourite as a hedge against fiat currency quantitative easing and mistrust of
the financial system, but appears overbought at present. Demand destruction in oil, lower industrial
production and the desperate need of foreign capital by all of the oil producers should conspire to keep
crude low for a while, despite platitudes of production cuts.
The bond markets are the key confidence indicator. Watch the US Treasury 10 and 30 year yields and
the UK Gilt yields for investors throwing in the towel and settling for very low returns as better than
nothing or risking a loss on equities. It is very interesting to note the June 30 year US Treasury futures
are trading over one point below the March futures (when they normally trade at a slight premium),
implying that the market expects bond prices to be lower and yields higher in three months (which is a
good sign). The 10 year US Treasury Note benchmark yield recently held above 2.70%, but any breach
of 2.5% is a very bad signal for confidence. Conversely, any advance beyond the recent high of 3.05%
is a good sign.
We are seeking new positions to implement into the portfolio, but uncertainty and gloom casts a long
shadow over the large amounts of cash that could be invested if market participants had any kind of
confidence. Once we have a clearer picture of cash flows, we will make some new suggestions.
EquityBellSecurities
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